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Decentralized cryptos bad, FedNow and digital dollar good - Economic Report of the President
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(Kitco News) - The Biden Administration released the latest “Economic Report of the President” on Monday, and for the first time, the report contained a dedicated section on digital assets – but had nothing positive to say about decentralized cryptocurrencies.
The chapter that focused on digital assets began by discussing the financial panic of 1907 that eventually led to the creation of the Federal Reserve and its exclusive power to issue U.S. dollar notes and manage the nation's money.
“Digital asset proponents are now aspiring to create a decentralized financial system without relying on governments and their regulatory frameworks, which were shaped by important lessons learned from multiple previous crises, including the 1907 panic,” the report said. These proponents are now “relearning the lessons from previous financial crises the hard way.”
While the report made no mention of the current economic difficulties in the global banking system or the role the Federal Reserve played in its creation, it noted that “Fortunately, there has not yet been a systemic crisis caused by crypto assets, in part because they are not yet fully integrated with the rest of the financial system, giving policymakers time to act appropriately.”
After listing some of the benefits often claimed by crypto proponents - such as improving payment systems and increasing financial inclusion – the report said that “so far, crypto assets have brought none of these benefits,” while the “costs generated by several of their aspects are not only substantial but are also being accrued in the present.”
“Indeed, crypto assets to date do not appear to offer investments with any fundamental value, nor do they act as an effective alternative to fiat money, improve financial inclusion, or make payments more efficient; instead, their innovation has been mostly about creating artificial scarcity in order to support crypto assets’ prices—and many of them have no fundamental value.”
Regulations and the FedNow alternative
From here, the report segued into highlighting the need to develop regulations to help protect consumers, investors, and the rest of the financial system, and also promote the benefits of central bank digital currencies (CBDC) over their decentralized counterparts.
After running through some of the purported benefits of crypto by proponents of the technology, the report offered a rebuttal to each point. The subsections of the rebuttals were titled, “Crypto assets are mostly speculative investment vehicles; Cryptocurrencies generally do not perform all the functions of money as effectively as sovereign money, such as the U.S. Dollar; Stablecoins can be subject to run risk; Crypto assets can be harmful to consumers and investors; and There have been limited economic benefits from DLT technology.”
A separate section that outlines additional risks from crypto assets included leverage risks, price volatility, illicit finance risks and ransomware uses.
The report went on to pitch the alternatives being developed by the government, including a digital dollar and the FedNow payment system, which is set to be released in July.
“Near instant payments under FedNow could bring significant benefits to vulnerable segments of the population,” the report said. “Slow payment systems can cost Americans billions of dollars. In addition to incurring bank overdraft fees, consumers can be forced to use high-cost alternatives like check cashers and payday lenders. Because lower income individuals are more likely to be hurt by slow payment systems, they could especially gain from these savings if FedNow is adopted widely.”
Interestingly, the thing that is required to make FedNow work – interoperability between banks, businesses and consumers – is the same limitation that the crypto industry has been working to overcome as it looks to offer a viable alternative to traditional payment rails.
“While noting that interoperability can take different forms, the Federal Reserve has maintained that it alone cannot fully establish the interoperability of FedNow; achieving this will require active partnership and collaboration with the financial industry,” the report said.
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The digital dollar
On the topic of a digital dollar, the report suggested that a U.S. CBDC “would have the potential to offer significant benefits. It could enable a payment system that is more efficient, provide a foundation for further technological innovation, facilitate faster cross-border transactions, and be environmentally sustainable. It could also promote financial inclusion and equity by enabling access for a broad range of consumers.”
A digital dollar could also help “ensure that such payment systems are aligned with the principles of human rights, democratic values, and privacy,” the report said.
But CBDCs are not risk-free, and they have the potential to pose credit availability risks similar to stablecoins.
“A widely available CBDC could serve as a substitute for commercial bank deposits. Just as in the case of stablecoins that are fully backed by safe assets, this substitution effect could reduce the aggregate amount of deposits in the banking system, which could in turn increase bank funding expenses, and thus could reduce credit availability or raise credit costs for households and businesses,” the report warned. “In addition, because central bank money is the safest form of money, a widely accessible CBDC would be particularly attractive to risk-averse users, especially during times of stress in the financial system. The ability to quickly convert bank deposits into a CBDC could make systemic bank runs more likely or more severe.”
In the end, the report fell back on the argument that has become the motto for many governments when it comes to cryptocurrencies: blockchain, not Bitcoin.
“Although the underlying technologies are a clever solution for the problem of how to execute transactions without a trusted authority, crypto assets currently do not offer widespread economic benefits,” the report said. “They are largely speculative investment vehicles and are not an effective alternative to fiat currency. Even so, it is possible that their underlying technology may still find productive uses in the future as companies and governments continue to experiment with DLT.”
For the U.S. government, the FedNow system and a digital dollar are the optimal routes to “bring the U.S. financial infrastructure into the digital era in a clear and simple way, without the risks or irrational exuberance brought by crypto assets.”
Reactions to the report from the crypto community have been somewhat mixed, with many pushing back against its negative view of the crypto industry while others saying it made some fair points. The overall consensus, however, is that this report is an continuation of the recent crackdown on the crypto ecosystem as central banks prepare to launch CBDCs.
As Dan Reecer, chief growth officer for Acala Network, tweeted in response to the report, “Just days after Operation Choke Point 2.0 was executed on US-based crypto-friendly banks, The Economic Report of the President was released yesterday, including an attack on crypto and an obvious early warning of an upcoming U.S. CBDC.”
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